Avoiding Slippage in Forex
"My Forex broker cheated me. I put in an order at one price and it got filled at another, and now I’m in a losing trade. That’s why I’m losing."
How often have you heard that story or been tempted to tell it yourself? One of the many risks of trading Forex is something called slippage. No, it is not your broker cheating you (well, that is up for debate, but seriously, do not make excuses for your lost trades). It is something you need to be aware of and compensate for during your trades.
What is slippage in Forex? Slippage is when you place an order at a quoted price, and your order gets filled at a different (worse) price than the one you were quoted. Slippage can be minor enough not to impact your trade outcome at all, or it can be major enough to stop you out the moment you have entered the trade! You can lose a lot of money through slippage, so it is something to be wary of and to avoid if at all possible.
Why is there slippage in Forex? Slippage tends to result during times of great volatility and also in response to fundamental events like unexpected news and macroeconomic reports. Slippage almost always happens when the market opens each weekend on Sunday nights! It is a result of the weekend price gaps. If you stay in a trade over a weekend, be very wary. Sunday nights are unpredictable — in general this is not a good day to trade.
If you do place a Forex trade, which you are going to hold over the weekend, or set up for a trade on the weekend, which might get triggered when the market opens again, compensate for that potential slippage. Place entries a little farther out than you usually would (testing will help you choose a good amount of buffer to leave). You may also want to move your stops out a little farther than usual too if you are already in a trade.
Do some Forex brokers deliberately make money through slippage? Probably, but slippage is a fact of life, even with good Forex brokers. It is best to learn to deal with it than to complain and blame someone else for your failure. There are bad brokers out there though, so if you are concerned you might have one, look up their ratings and find out about other traders’ experiences.
On a related note, you can set up most broker platforms to show you the spread. This should help you to understand spread and slippage better and thus make better trading decisions. Spread widens and shrinks in different market conditions — during volatile ones, it tends to widen (which is how slippage usually occurs). By setting your charts to show this spread, you will be able to visually see the days of the week and the times at which the spreads widen the most. Then you can compensate in the future by following the previous suggestions to avoid slippage in Forex outright or work around it.